Sherway Centre Ltd. v. Canada, 2003 DTC 5082, 2003 FCA 26

                                                                                   

Date: 20030121

Docket: A-707-01

Neutral citation: 2003 FCA 26

CORAM:        STRAYER J.A.

EVANS J.A.

PELLETIER J.A.

BETWEEN:

                                                         SHERWAY CENTRE LIMITED

                                                                Appellant

                                                                                 and

                                                           HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                          Heard at Toronto, Ontario, on November 26, 2002.

                                  Judgment delivered at Ottawa, Ontario, on January 21, 2003.

REASONS FOR JUDGMENT BY:                                                                                       EVANS J.A.

CONCURRED IN BY:                                                                                                       STRAYER J.A.

                                                                                                                                           PELLETIER J.A.

Date: 20030121

Docket: A-707-01

Neutral citation: 2003 FCA 26

CORAM:        STRAYER J.A.

EVANS J.A.

PELLETIER J.A.

BETWEEN:

                                                         SHERWAY CENTRE LIMITED

                                                                Appellant

                                                                                 and

                                                           HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

EVANS J.A.

A.        INTRODUCTION

[1]              This is an appeal from a decision of the Tax Court, reported as Sherway Centre Limited v. The Queen, 2001 D.T.C. 1021 (T.C.C.). The Court dismissed an appeal by Sherway Centre Limited against income tax reassessments for the years 1989, 1990 and 1991. The dispute involves the interpretation of statutory provisions that define the scope of the Minister's power to reassess following a taxpayer's successful appeal against an income tax reassessment for a previous year, and that confer a right to file a notice of objection to a reassessment made as a result of that appeal.

[2]             Two competing, although not absolute, principles of tax administration inform the positions of the parties on the interpretation of the relevant provisions, subsections 152(4.3) and 165(1.1) of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c.1. Sherway advocates a broad interpretation by invoking the principle that the Crown ought not to be able to retain funds paid to it by a taxpayer in excess of the amount of tax owing. The Minister, however, maintains that a narrow interpretation of the provisions promotes certainty in tax matters, and enhances the integrity of the carefully tailored and complex scheme created by Parliament for the administration of income tax.

[3]             The origin of the dispute in this appeal is an earlier decision of this Court holding that paragraph 20(1)(c) of the Income Tax Act entitled Sherway to deduct from its income for the taxation years 1987 and 1988 interest that it had paid ("participating interest") on mortgage bonds that it issued to finance the development of a shopping centre: The Queen v. Sherway Centre Limited, 98 DTC 6121 (F.C.A.).

[4]                 The principle on which this decision was based would have been equally applicable to the interest paid on the same bonds by Sherway in the years 1989, 1990 and 1991, the years in question in this appeal. However, Sherway failed to object to the original reassessments for these years and the time for so doing has long expired.

[5]             Whether Sherway can nonetheless ensure that the basis of the successful appeal of the years 1987-88 is extended to 1989-91 depends on the interpretation of two provisions. The first, subsection 152(4.3), authorizes or, at the taxpayer's request, requires the Minister to reassess, outside the normal period, after a successful appeal has altered a taxpayer's balance in a particular tax year, "but only to the extent that the reassessment can reasonably be considered to relate to the change in the balance of the taxpayer for the particular year."

[6]             Sherway takes the position that this provision requires the Minister to reassess the years 1989-91 in a manner that is consistent with the principle on which the decision respecting the years 1997 and 1998 was based: namely, that participating interest payments are deductible from its income. The Minister, however, submits that subsection 152(4.3) permits the Minister to reassess only to the extent that the reassessment following the decision can reasonably be considered to relate to a change in the taxpayer's balance for the years in question. According to the Minister, a change in the "balance" means simply a change in the computation of, for example, the taxpayer's income, taxable income or loss, and not the reason underlying the change.

[7]             Second, and in the alternative, Sherway maintains that, even if the scope of the power to reassess the years 1989-91 under subsection 152(4.3) is as limited as the Minister contends, it is in any event entitled to object under subsection 165(1.1) to the reassessments for 1989-91, and thereby to obtain a deduction of the participating interest that it paid in those years. Subsection 165(1.1) provides that, notwithstanding the periods prescribed in subsection 165(1) within which a taxpayer may normally object to an assessment, when an assessment has been made under subsection 152(4.3), the taxpayer may object within 90 days of mailing the notice of assessment, "but only to the extent that the reasons for the objection can reasonably be regarded as relating to any matter that gave rise to the assessment".

[8]                 The Minister, however, submits that this subsection does not assist Sherway. The reason for Sherway's objection to the reassessment is that it is entitled to deduct participating interest payments from its income for 1989-91, and the matter giving rise to the reassessment permitted under subsection 152(4.3) was the change in its balance as a result of the reassessments for 1987 and 1988. Since the reason for the objection cannot reasonably be regarded as related to the change in the balance, subsection 165(1.1) does not apply. If Sherway cannot directly appeal the reassessments for 1989-91 on the ground that its interest payments were deductible, the Minister says, it cannot do so indirectly through subsection 165(1.1).

B.       FACTUAL BACKGROUND

[9]             This appeal turns on the interpretation of the administrative provisions of the Income Tax Act quoted above. However, it is not necessary to delve deeply into the factual background to the substantive issues relating to Sherway's ability to deduct the participating interest payments that it made in 1997 and 1998, and the similar payments made in the years 1989-1991, which it would have been able to deduct if it had exercised in time its right to object to the reassessments of those years or to file waivers.

[10]         Suffice it to say that, in 1971, Sherway issued mortgage bonds to secure $21,5000,000 that it borrowed to finance the construction of a shopping centre, which it subsequently operated. In the years 1984 to 1991, Sherway deducted from its income the amounts of the participating interest that it had paid each year on the bonds. However, in 1992, the Minister reassessed Sherway's income for 1987 and 1988 and disallowed the interest deductions in those years. The effects of this were to: (a) increase Sherway's income for those years by the amount of the interest; (b) increase by the same amount non-capital losses carried forward from earlier years that were needed to offset income earned in 1987 and 1988; and (c) reduce the amount of non-capital losses available to be carried forward to offset income in subsequent years.

[11]          In 1994, after the reassessments for 1987 and 1988 had been challenged, but before this Court held that the interest payments were deductible, the Minister reassessed Sherway's income for 1989-1991 and disallowed the interest payments made in those years. However, Sherway filed no objection or waiver within the prescribed time with respect to these reassessments.

[12]         In order to give effect to the decision of this Court holding that the Minister had erred in disallowing the deduction of the participating interest payments for 1987 and 1988, the Minister reassessed those years in June 1998. As a result, the Minister deducted the participating interest from Sherway's income and, because this decreased the non-capital losses needed to reduce its income tax liability, the Minister also recalculated the carry-forward non-capital losses available on December 31, 1988 by increasing them from $5,989,762 to $7,634,761.

[13]            In addition, in 2001 the Minister reassessed the years 1984-1986. Because 1984 and 1985 had been negative income years, there was no limitation period on reassessments. A late reassessment of 1986 was possible because Sherway had filed a waiver in respect of that year. In the reassessments for 1984-86, the Minister allowed the deduction of the participating interest payments made in those years and recalculated the non-capital losses available for carrying forward. As a result, Sherway's non-capital loss balance as of December 31, 1988, was further increased by $2,077,030 from $7,634,761 to $9,711,791. The Minister has not given effect to these increases pending the outcome of this appeal.

[14]         Meanwhile, in February 1999, the Minister issued reassessments for 1989-91, consequential upon the 1998 reassessments for 1987 and 1988, which, as I have already noted, not only decreased Sherway's income for those years, but also decreased the non-capital losses used, thereby increasing the carry-forward non-capital losses available for future years. Consequently, in accordance with Sherway's directions, the Minister applied the $7,634,761 in Sherway's non-capital loss balance as of December 31, 1988 to reduce its taxable income in these positive years as follows; $100 for 1989, $1,500,000 for 1990, and $2,937,962 for 1991.

[15]         In May 1999, Sherway filed a timely objection to the February 1999 reassessments of the years 1989-91, alleging that it was also entitled to deduct the participating interest payments made in those years: $898,219 in 1989; $1,195,617 in 1990; and $2,391,234 in 1991. The Minister concedes that, if Sherway had filed a timely notice of objection or a waiver following the 1994 reassessements for 1989-91, these amounts would have been deducted as a result of the decision of the Federal Court of Appeal respecting the years 1987 and 1988. However, in the absence of either, the Minister concluded that he had no power to reassess by deducting the participating interest payments in 1989-91.

C.    DECISION OF THE TAX COURT

[16]         The argument put to the Tax Court on behalf of Sherway was significantly different from that advanced on the appeal to this Court. Submissions that lost in the Tax Court were abandoned, while others were made for the first time before us. Consequently, there is little value in describing in any detail the Tax Court's reasons.    

[17]         However, it can be noted that, in dismissing the appeal, the Tax Court Judge rejected the argument that subsection 152(4.3) permitted or required the Minister to reassess the years 1989-91 by giving effect to the principle on which this Court had allowed the appeal from the reassessments for 1987 and 1988, namely, that the participating interest payments were deductible from Sherway's income. He accepted the Minister's argument that, when read in conjunction with the definition of "balance" in subsection 152(4.4), subsection 152(4.3) did not enable the Minister to give effect in his reassessment to the reason for the change in the balance in the previous years. Therefore, the reassessment could not reasonably be considered to relate to the change in the taxpayer's balance for 1987 and 1988.

[18]         In view of the Federal Court of Appeal's decision on the substantive issue of the deductibility of the participating interest payments in 1987 and 1988, the Judge observed (at para. 18) that the dismissal of the appeal "may seem an unfortunate result", but attributed it to the failure of the taxpayer to exercise its right to file a timely waiver or a notice of objection to the 1994 reassessments of the years 1989-91.

D. LEGISLATIVE FRAMEWORK

             Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1

E.       ANALYSIS

Issue 1: The scope of subsection 152(4.3)

[19]         I deal with this issue first, even though, in his oral submissions, counsel for Sherway indicated that it was his subsidiary argument. It is appropriate to consider the arguments in the order in which counsel presented them in his written submissions because, in my view, the    subsection 165(1.1) argument cannot be disposed of conclusively until the proper interpretation of subsection 152(4.3) is determined.

[20]        Subsection 152(4.3) is an exception to subsection 152(4) which provides that, with some specified exceptions, the Minister may only reassess a taxpayer within the taxpayer's normal reassessment period. Subsection 152(4.3) was enacted to enable the Minister to reassess outside the normal limitation periods in consequence of an assessment or an appeal that changed the balance of a taxpayer in a particular year, "but only to the extent that the reassessment ... can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year." On the facts of this case, the "balance of a taxpayer for the particular year" is defined by subsection 152(4.4) as the income of the taxpayer for that year.

[21]            It is agreed that the first condition triggering the application of subsection 152(4.3) is satisfied. The 1998 reassessments of Sherway for the years 1987 and 1988 effected a "change" in the taxpayer's balance for those years. In addition, counsel for Sherway submits that, on the facts of this case, subsection 152(4.3) requires the Minister, when determining the "balance" to go behind the dollar amount of the adjustment to Sherway's income for 1987 and 1988. The Minister must also give effect to the reason for the change in the income, namely, the deductibility of the participating interest payments made in those years. Hence, the claim that the reassessments of 1989-91 allow the deduction of the participating interest paid by Sherway in these years on the same bonds "can reasonably be considered to relate to" the deduction of the interest payments in 1987 and 1988 following the decision of the Federal Court of Appeal holding that they were deductible.

[22]            I cannot accept this argument. It seems contrary to the plain language of subsection 152(4.3). The "balance of a taxpayer for a taxation year" suggests a sum: a numerical calculation of an amount of money. To refer to the taxpayer's "balance" would surely be an odd way for Parliament to express an intention that the Minister must look beyond the computation and consider the principles on which it is based. This view of subsection 152(4.3) is bolstered by subsection 152(4.4), which states that the "balance" of a taxpayer in a particular taxation year is "the income, taxable income ... or any loss of the taxpayer" for that year. Again, it is difficult to interpret this language as a reference to the legal principles on which the taxpayer's income is determined.

[23]            Counsel for Sherway relied on Hill v. The Queen, [1996] 1 C.T.C. 2894 (T.C.C.) as authority for the view that, on a reassessment under subsection 152(4.3), the Minister can look behind the numerical balance and take account of the reason for it. The Minister had reassessed Mr. Hill for the years 1983 and 1984 so as to include in his income a shareholder loan. In addition, the reassessment deducted Mr. Hill's repayment of the loan from his income for 1985 in accordance with paragraph 20(1)(j).

[24]            Mr. Hill appealed the 1983 and 1984 reassessments, and the Tax Court held that the Minister had been wrong to include the loans in Mr. Hill's income by virtue of subsection 15(2). The Minister subsequently reassessed 1985 and, as a result of the Tax Court's ruling that the loans should not have been included in the 1983 and 1984 income, the Minister disallowed the amount repaid in 1985 on the loans, thereby increasing the tax payable by Mr. Hill for that year. Mr. Hill appealed the reassessment. As a result of the Court's decision to exclude the loans from Mr. Hill's income, the repayment in 1985 could not be the repayment of a loan within the meaning of paragraph 20(1)(j), because the loan was not "by virtue of subsection 15(2) included in computing the taxpayer's income."   

[25]            The Court dismissed the appeal, on the ground that subsection 152(4.3) permitted this out-of-time reassessment. The previous ruling by the Tax Court changed the balance of the taxpayer in the years 1983 and 1984 by excluding the loans from the taxpayer's income. The reassessment for 1985 disallowing the repayment of the loan could reasonably be considered to relate to the change in the balance for 1983 and 1984. Hence, the 1985 reassessment was authorized by subsection 152(4.3).

[26]            I agree that the Court in Hill did take into account the reason for the change in the taxpayer's balance for 1983 and 1984 when reassessing for 1985. However, the Minister looked behind the change in the numerical balance for 1983 and 1984 only for the purpose of ensuring that one half of a transaction, the repayment of the loan, was treated in a manner consistent with the treatment of the other half, the borrowing. If the loan could not be included in computing the taxpayer's income for the purpose of subsection 15(2), its repayment was, by definition, not deductible under paragraph 20(1)(j). There was thus a numerical causal connection between the change in the balance in 1983 and 1984, and the balance in 1985.

[27]            In my view, counsel for Sherway is asking the Court to go considerably further than this when he says that the change in Sherway's income in 1987 and 1988, as a result of the deduction of the participating interest, reasonably related to the deductibility of interest paid in subsequent years, albeit on the same bonds. The "relationship" depends entirely on the applicability of the legal principle used to determine the tax effects of payments received in one year to quite separate and independent payments received in subsequent years. This is not the kind of relationship contemplated by subsection 152(4.3).

[28]            Accordingly, I conclude that the Tax Court Judge was correct in law to hold that subsection 152(4.3) does not authorize the Minister to reassess 1989-91 by extending the principle on which Sherway's successful appeal of its 1987-8 reassessments was based. The reassessment requested by Sherway for 1989-91 cannot "reasonably be considered to relate to the change in the particular balance of the taxpayer for" 1987-88.

Issue 2: The scope of subsection 165(1.1).

[29]            Counsel submitted that, even if the Minister could not allow the deduction of participating interest from Sherway's 1989-91 income in a reassessment under subsection 152(4.3) consequential upon the Court's decision respecting the deductibility of the interest from its 1987-88 income, Sherway nonetheless had a right under subsection 165(1.1) to file a notice of objection to the 1999 reassessments for 1989-91. The reassessments could be challenged on the ground that Sherway was entitled to deduct the participating interest.   

[30]            Notwithstanding the general limitation periods contained in subsection 165(1), a taxpayer may object to an assessment made pursuant to, among other provisions, subsection 152(4.3), "but only to the extent that the reasons for the objection can reasonably be regarded ... as relating to any matter that gave rise to the assessment."

[31]            Applying subsection 165(1.1) to the facts of this case, counsel for Sherway argued that the reason for the objection was the Minister's failure to deduct the participating interest from Sherway's 1989-91 income. The "matter that gave rise to the assessment" was the change in Sherway's 1987-88 income as a result of this Court's decision that the participating interest was deductible in those years.

[32]            Counsel concedes that, since Sherway failed to file a timely notice of objection when its 1989-91 income was first reassessed in 1994, subsection 165(1.1) does not enable it to raise any issue it chooses with respect to the reassessment of those years in 1999. An issue can only be raised on an appeal under subsection 165(1.1) if it can reasonably be regarded as relating to the matter that gave rise to that reassessment, namely, the change in Sherway's income for 1987-88. Such a relationship exists on the facts of this case, he argued, even if it is not causal in nature. Accordingly, if the notice of objection is valid, the Minister must vary the reassessment by deducting the participating interest paid by Sherway in 1989-91 when he considers the objection under subsection 165(3).

[33]            As authority for his argument that subsection 165(1.1) envisages a range of relationships that may trigger the application of the subsection, counsel relied heavily on The Queen v. Chevron Canada Resources Limited, 97 DTC 1173 (T.C.C.), rev'd. 98 DTC 6570 (F.C.A.). In particular, he noted the following statement (at 1180) by Bowman T.C.C.J. (as he then was) on the application of subsection 165(1.1) to the facts before him: "The matter that gave rise to the reassessments following the consent to judgment was the deductibility of certain types of expenses and the computation of resource profits." The emphasis is mine.

[34]            Applying this dictum to the instant case, counsel argued, would mean that the "matter" that gave rise to the reassessments of the years 1989-91 was the deductibility of participating interest in 1987-88, and that this is reasonably related to the reasons for the objection, namely, the deductibility from Sherway's 1989-91 income of the participating interest that it paid on the same bonds.

[35]            This Court allowed the appeal from the Tax Court in Chevron, on the ground that the consent judgment had "conclusively determined" all the matters that had given rise to the reassessments within the meaning of subsection 165(1.1). However, writing for the Court, Noël J.A. approved Judge Bowman's general approach to subsection 165(1.1). Counsel relied, in particular, on the following statement by Noël J.A. (at para. 28) with respect to the words of subsection 165(1.1) that are in contention in the present appeal:

... the words used suggest that Parliament was mindful of the complexities of the Act and the variety of ways in which issues can interrelate. Parliament did not prescribe any specific type or manner of relationship (note 20: causal or otherwise) but left it to the Court to ascertain on the facts of each case whether the reasons for objection when considered in the light of the matter that gave rise to the assessment, were sufficiently related to justify a right to pursue the matter further [emphasis added].    

[36]            Despite the ingenuity of counsel's argument, I am not persuaded that subsection 165(1.1) applies to the facts of the present case. In my opinion, it would be very odd to conclude that Parliament intended subsection 165(1.1) to enable a taxpayer to appeal a reassessment made under subsection 152(4.3), on a ground on which subsection 152(4.3) does not permit the Minister to reassess. The interpretation of subsection 165(1.1) advanced by counsel would indirectly achieve a result that subsection 152(4.3) directly precludes.

[37]            In my view, it is more consistent with the structure of the statutory scheme to treat subsection 152(4.3) as the principal provision in the following sense. The right to object under subsection 165(1.1) does not extend to an objection to a reassessment under subsection 152(4.3) when the reason for the objection could not have been the subject of a reassessment under subsection 152(4.3).

[38]            Counsel noted that subsection 165(1.1) also applies to reassessments made under provisions of the Income Tax Act other than subsection 152(4.3), and that, at the objection stage, the scope of the reassessment is not tailored individually to each such provision. However, this does not persuade me that subsection 165(1.1.) envisages an objection to a subsection 152(4.3) reassessment on a ground other than one on which the Minister could have reassessed under subsection 152(4.3) itself.

[39]            Accordingly, in this case, the "matter" that gave rise to the 1999 reassessment of the income for 1989-91 was the change in Sherway's balance for the years 1987-88 as a result of the decision of this Court that participating interest was deductible from income in the years 1987-88: that is, the reduction in the taxpayer's income for those years and in the amount of the non-capital losses consequently required to be used to reduce the taxpayer's income. Hence, there would be a relationship between the "matter" if Sherway were objecting to the reassessments for 1989-91 on the ground that the Minister had not increased the carry-forward non-capital losses. However, there is no sufficiently close relationship, "causal or otherwise", to quote Noël J.A. in Chevron, between the change in Sherway's balance in 1987-88 and the deductibility of participating interest in 1989-91.

[40]            I see no inconsistency between the reasons given in Chevron by this Court and my conclusion in the instant case. Chevron was a very different case from that before us. It concerned the computation of resource allowance in the years 1985-86 following litigation between the parties in the Tax Court that culminated in a consent judgment concerning the computation of the resource allowance in those years, and a decision involving another taxpayer respecting elements to be included in computing the allowance.

[41]            It was held on the appeal in Chevron that subsection 165(1.1) did not enable the taxpayer to object to its reassessment on any issue related to its resource allowance, because the computation of the resource allowance was to be taken to have been conclusively determined by the consent judgment. In contrast, res judicata does not arise in the instant case because the reassessments relate to different years.

[42]            Neither the Tax Court, nor the Court of Appeal in Chevron expressly considered subsection 152(4.3), or its relationship to subsection 165(1.1). Indeed, it is not at all clear that the reassessment was made under subsection 152(4.3). Moreover, the position taken by the Minister in our case (namely, that Sherway was entitled to object to an assessment for 1989-91 that failed to adjust the non-capital losses) is consistent with Judge Bowman's opinion (at 1180) that the scope of the objection permitted under subsection 165(1.1) falls between two unacceptable extreme interpretations:

one that confers a right to object solely for the purpose of correcting an assessment that does not conform to a judgment and one that confers a completely open-ended right to object.

E.        CONCLUSIONS

[43]            For these reasons, I conclude that the Tax Court did not err in law when it held that the Minister had no power to reassess Sherway by allowing it to deduct from its income the participating interest payments made by it in 1989-91, even though ambiguities in tax legislation are presumptively resolved in a manner that prevents the Crown from retaining more than it was legally entitled to receive.

[44]            However, in my view, when viewed within the complex statutory scheme for assessments, reassessments and appeals, the meaning of the technical provisions in question in this case is sufficiently clear that the principle that ambiguities should be resolved in favour of the taxpayer is not engaged, especially since the interpretation propounded by Sherway could, in other circumstances, expose taxpayers to the uncertainty, and potential unfairness, caused by considerably longer reassessment limitation periods. It is the nature of limitation periods that their application will sometimes cause taxpayers to pay either more, or less, tax than they were legally obliged to pay.

[45]            By missing the limitation period for objecting to the reassessments for 1989-91, Sherway is, to a large extent, the author of its own misfortune. Apart from the adjustment of non-capital losses, the successful appeal of the 1987 and 1988 reassessments did not provide it with a novel ground on which to object to the 1999 reassessments for 1989-91 that did not exist in 1994 when it could have filed a notice of objection.

[46]            For all these reasons, I would dismiss the appeal with costs.

                                                                                        "John M. Evans"          

                                                                                                              J.A.                       

"I agee.

        B.L. Strayer J.A."

"I agree.

J.D. Denis Pelletier J.A."

                          FEDERAL COURT OF APPEAL

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

  

DOCKET:                                       A-707-01

STYLE OF CAUSE:                      SHERWAY CENTRE LIMITED

                                                                                                     Appellant

- and -

HER MAJESTY THE QUEEN

                                                                                                 Respondent

                                                         

PLACE OF HEARING:              TORONTO, ONTARIO

DATE OF HEARING:                  TUESDAY, NOVEMBER 26, 2002

  

REASONS FOR JUDGMENT BY:              EVANS J.A.

CONCURRED IN BY:                 STRAYER J.A.

PELLETIER J.A.

  

DATED:                                           January 21, 2003

  

APPEARANCES:

Mr. L. Meghji

Mr. G. Grenon                                                     FOR THE APPELLANT

Mr. J. S. Gill, Q.C.

Ms. Judith Sheppard                                             FOR THE RESPONDENT

  

SOLICITORS OF RECORD:

OSLER, HOSKIN & HARCOURT

Toronto, Ontario                                                  FOR THE APPELLANT

Morris Rosenberg

Deputy Attorney General of Canada                                FOR THE RESPONDENT